Why eBay's decision to drop PayPal is a good thing

PayPal COO Bill Ready contends eBay’s decision to ditch the company and use Adyen to process payments moving forward is actually good for PayPal (PYPL).

On Wednesday, eBay (EBAY) announced it plans to use smaller European competitor Adyen to process payments on the back-end once its original partnership with PayPal runs out in 2020 — news that initially sent PayPal stock down as much as 8.8% in one day.

Under the original terms of the agreement, eBay uses PayPal as its primary payments provider, meaning that the majority of transactions processed on eBay were processed through PayPal. In exchange, PayPal was restricted in how it works with other marketplaces that compete with eBay. While PayPal was free to work with marketplaces that rival eBay, PayPal couldn’t offer the same degree of services to other marketplaces.

But come July 2020, that will change. Under the new terms PayPal and eBay agreed upon, which will last until 2023, PayPal will be free to work with other marketplaces and offer the same level of payments experience it once offered eBay, therefore potentially processing more transactions. PayPal will still be a payments provider option for eBay, but it won’t be processing certain transactions — transactions that involve entering your credit card information, for instance — as it had previously.

“This was always the plan since PayPal and eBay separated,” Ready emphasized, referring to eBay’s spin-off of PayPal into its own publicly-traded company in 2015.

PayPal reported adjusted fourth quarter 2017 earnings of 55 cents a share on revenue of $3.74 billion — up 26% year-over-year. For the full year of 2018, PayPal forecasts profit of $2.27 per share with revenue between $15 billion and $15.25 billion, compared with analysts’ estimates of $15.16 billion.

It’s also worth noting that while eBay transactions currently account for 13% of PayPal’s overall payments volume, that number is steadily declining, according to PayPal. And while eBay’s revenue from marketplaces continue to grow by 4%, that number is downright anemic when compared to median growth of marketplace competitors, which are growing at a 50% year-over-year clip.

Which is to say, this latest chapter in eBay and PayPal’s separation is a significant one, but not the harbinger of doom for PayPal that some media have made it out to be.

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JP Mangalindan is the Chief Tech Correspondent for Yahoo Finance covering the intersection of tech and business. Email story tips and musings to jpm@oath.com. Follow him on Twitter or Facebook.